After 2002, mutual fund industry in
Pakistan has witnessed significant changes and growth in terms of private sector
participation and divestment of public sector funds. This faction in Pakistan is
still in its growing phase. Overall results of the capital markets as well as
funds suggest that mutual funds in Pakistan are able to add more value.
Worldwide there had been a tremendous growth in this industry; mainly because of
the overall growth in both the size and maturity of many foreign capital
markets, we are far behind. By 2002, there were only two companies; the National
Investment Trust (NIT), the biggest and the oldest, which represented the public
sector; and the second and the only one operating in the private sector was
ABAMCO, which was managing only one fund. In 2002, private sector joined in and
now the total number of asset management companies is around 34. The total
investment in bank deposits including national saving schemes - two areas where
common people invest - is around four trillion rupees, and the total investment
in mutual funds is hardly 200 million rupees, around five percent of the total
savings in banks and NSS. If compare with a developed mutual fund market such as
the United States, it seems obvious that the investment in the mutual fund
industry is around 1.2 or 1.4 times higher compared to bank deposits, which
shows the potential of growth in an underdeveloped market like ours. With
developments in the previous few years, we are heading in the right direction.

Currently mutual funds account for only
2.4 percent of the country's GDP as compared to 6.0 percent for India and 69.0
percent for the USA. Mutual fund accounts for 16.5 percent of Pakistan's
national savings. This sector holds great potential for future. The industry has
witnessed phenomenal growth during the last 4-5 years. Its total assets have
increased from Rs 25 billion in June 2002 to about Rs 215 billion in March 2007,
showing an increase of 760 percent. The industry has gained popularity due to
its improved and disciplined behavior, government support, development of
specialized innovative products and investment friendly environment. In March
2007, there were 67 mutual funds as against 46 in June 2006, which included 43
open ended and 24 close ended funds. Besides, 19 more were in the pipeline. At
present there are 34 assets management companies registered and licensed by the
SECP. New and innovative products are being designed and offered in the market
for both corporate and individual investors.

As far as the composition of funds in
Pakistan market is concerned, a break up reveals that out of total, 49% are
equity funds, 23% are balanced funds whereas 29% are Islamic funds. During first
quarter of FY 2008 the best performer on average was Islamic Fund Category that
with a return of 2.45%. The local open-end equity mutual funds constitute about
0.29% of the total market capitalization of Karachi Stock Exchange in September
2007. The recorded size of the open-ended equity funds came to about PKR128 bn
including NIT. NIT being the oldest and the largest constitutes about 78.12% of
the open-ended equity funds. However the total equity fund industry excluding
NIT is worth PKR 27.8 bn. NIT in Pakistan and UTP in India were established
around the same time. While the value of portfolio of UTP India exceeds US$ 44
million; the portfolio of NIT is too small compared to that of its Indian
counter part. The same is also true about the number of unit holders. Even if
one keeps the population of India and Pakistan in mind, the ratio is still
dismal.

The current scenario of capital markets
have exhibited a volatile spell and in 2007 the KSE-100 Index plunged to the
lowest level of decline of 17.3%, which was triggered by domestic political
instability as well as a net outflow of foreign investment due to credit
concerns in the US sub prime mortgage market. This sub prime issue affected
markets all around the world and an average decline of 10% - 15% was observed
globally. In line with the capital markets the local mutual fund industry showed
an average decline in returns of only 0.56% as compared to an overall 4.15%
decline in KSE-100 index in first quarter of FY08. However now the mutual fund
industry has taken intelligent investment decisions and has regained momentum as
monthly returns are likely to demonstrate significant increases over the market.

It largely depends on maturity of the
market and the choice of investor to invest in banks or mutual funds. As banks
are not passing on the benefits as much as they can, therefore more and more
investors are deviating towards mutual funds market. The growth in this sector
shows that investors have started to realize that there are many types of funds
and investment modes such as money market fund, debt funds etc, which are almost
as low-risk as deposits in banks or NSS, with far better potential for returns.
The new products so far offered include shariah complaint products,
sector-specific products etc. The new products to be offered in the near future
include pension funds, real estate funds, infrastructure funds etc., which are
being developed to suit investor's risk and return profile and their cash flow
needs. The mutual funds industry has attracted attention of professionals,
entrepreneurs and investors alike. This enabling environment has led to
phenomenal increase in the number of mutual funds. The industry is on the path
of steady progress and competing with banks in attracting savings, besides
supporting and underpinning the stock market activities. The mutual funds sector
is set to attract growing pubic attention owing to better investment prospects
and effective role in brining about betterment in the national economy. The
sector is now focusing on specialized financial products aimed at niche markets
with a view to cater to the requirement of all types of investors. The
performance of the mutual funds industry has generally kept pace with the
performance of the stock market. The permission granted by the SBP to local
mutual funds to invest 30 percent of their assets abroad with a cap of US $ 15
million has enhanced the image of mutual funds among the investors. During 2006
before taxation profit of 23 close ended mutual fund was Rs 8.28 billion as
compared to Rs 7.55 billion during 2005. Although asset managers are working on
innovative financial products, there is a real need to create general awareness
about mutual funds in the retail segment of investors. Mutual funds are set to
give tough competition to NSS and Bank Deposits in the near future, provided the
asset managers and the financial planners work collectively in establishing
enlightenment among the masses, the market, which is still largely untapped.

UNDERDEVELOPED MARKET - CAUSES

In Pakistan most of the private sector
closed-ended funds were established in early nineties, when there was a boom in
equities market, prices of scrips were high and only possibility for investment
was in equities - corporate debt and money market instruments were not common at
that time. Therefore, when equity market plunged most of the funds posted huge
losses.

Another major reason for impediments in
growth of mutual funds has been the GoP insistence on not allowing establishment
of open-ended funds in the private sector. The apprehensions of the regulators
were that private sector could not manage an open-ended fund efficiently and
prudently. This impression was mainly due to the poor performance of
closed-ended funds managed by the private sector.

It is true that market sentiments led
to huge losses, but the blame should also go to sponsors for managing funds in
imprudent manner. Some of the funds were used for 'parking' of bad transactions.
A number of mutual funds were sponsored by brokerage houses or those who used
the funds for trading of equities. Most of these sponsors indulged in
speculative trading rather than taking long positions or making long-term
investment. The concept of parking of bad transaction in mutual fund account was
used to avoid immediate loss, in the hope of recovery. The recent results by
various asset management companies indicate that all those funds which are
managed prudently and efficiently have the potential to earn substantial profit.

FUTURE OUTLOOK

While most of the equity markets around
the globe have plunged due to erosion in the faith of investors in 'Corporate
America', the KSE-100 index has shown range-bound movement. This can be
attributed to two factors, strong economic fundamentals and incredibly
attractive dividend yield. Corporate earnings are expected to remain high. Since
most of the mutual funds have large exposure in equities. Any improvement in
corporate earnings is expected to have positive impact on them. Another factor
which has the potential to boost investor's confidence in equities market is the
SECP's drive to improve level of corporate governance at the listed companies.
The regulators along with the institutions need to promote international best
practices and corporate governance, spread consumer awareness and maintain
investor's confidence.

Analysts also suggest that the GoP must
allow establishment of more and more open-ended funds to ensure greater
liquidity for the capital market. The flotation of large number of TFCs is a
clear manifestation that more and more corporations now prefer to mobilize funds
through debt instruments rather than borrowing from financial institutions.

Government should take prompt and
closely controlled steps to enhance the mutual funds industry in order that it
clearly plays its role of underpinning the financial markets and serves as an
effective channel for mobilizing resources and allocating them to productive
uses. In reference to bank reserve requirements, permissible provident fund
investments etc, policy makers should not distinguish between government
securities and mutual funds accredited with high, investment grade, ratings. As
far as possible, there ought to be a level playing field between investing in
mutual funds and in Government securities. Policy makers should adopt cogent
measures to promote the provision of pension and retirement benefits to a
substantial part of the population and clearly this would not be feasible
without the involvement of competent fund managers.

A good fund manager is required to
follow the policy or strategy that he has defined or committed to the investors
regarding the fund they are investing in. If a fund was introduced as a money
market fund, then the fund manager should keep his commitment and not enter any
other market, such as the share market, which has different levels of risk and
requirements. And if the fund was structured to cater short-term investment,
then it should really work as a short-term investment strategy. Similarly if
fund is for speculative trading, it should act like a speculator, but on the
other hand, if commitment with the investors was for a growth fund, manger has
to restrain from acting otherwise.

The funds should also disclose the
level of risk associated with return in their annual reports for the information
of investors and prospective investors. This will enable the investors to
compare the level of return with the level of risk. The success of this sector
depends on the performance of funds industry and the role of regulatory bodies.
Excellent performance and stringent regulations will definitely increase the
popularity of mutual funds in Pakistan.